Important changes to pensions.
Important changes are being introduced to pensions on 6th April 2015; new legislation is increasing the flexibility afforded to individuals in deciding how to operate their pensions.
The change that has excited much media attention is in relation to defined contribution pension schemes. Anybody who is over 55 with such a scheme may choose to take as much money as they like in a lump sum from their pension pot. However, only 25% of the pension pot taken by way of lump sum will be tax free and alternative options to taking a lump sum are also available.
Pension-holders may enter a flexi-access drawdown or, as previously, take a life-time annuity. Flexi-access drawdowns keep the pension pot intact and take income from it as and when it is needed, tax is only payable on income drawn from the pension pot. Taking a life time annuity provides income for the rest of the pension-holder's life by way of a fixed yearly sum, which, whilst providing security, can sometimes be poor value. The yearly income from an annuity may be increased if the individual has ill health or a shortened life expectancy.
There are other changes that will be introduced on the 6th of April are as follows: if a pension-holder dies before the age of 75 the pension pot will be inherited tax free; if a pension-holder dies after the age of 75, those inheriting the pension will only pay 45% tax rather than 55% on the lump sum; the amount allowed to be saved in any one pension pot will be reduced from £1.25m to £1m; state pensions will now only have a single tier; and, to qualify for a full state pension individuals will need 35 rather than 30 years of NI contributions.
Trustees of pension schemes should also be aware of the additional responsibilities they have, namely checking that a pension-holder who wishes to transfer to a defined contribution arrangement has obtained suitable independent advice from an authorised advisor of the relevant regulated activity.
These changes will potentially affect the way in which pensions on divorce are handle and so specialist financial and legal advice should always be taken.